prudent investor newsletters

Quote of the Day: Knowledge Plus Inequality Equals Progress

noreply@blogger.com (benson_te) — Fri, 27 Jan 2012 11:52:00 +0000

The rapid economic advance that we have come to expect seems in large measure to be the result of this inequality and to be impossible without it. Progress at such a fast rate cannot proceed on a uniform front but must take place in echelon fashion, with some far ahead of the rest. The reason for this is concealed by our habit of regarding economic progress chiefly as an accumulation of ever greater quantities of goods and equipment. But the rise of our standard of life is due at least as much to an increase in knowledge which enables us not merely to consume more of the same things but to use different things, and often things we did not even know before. And though the growth of income depends in part on the accumulation of capital, more probably depends on our learning to use our resources more effectively and for new purposes.

The growth of knowledge is of such special importance because, while the material resources will always remain scarce and will have to be reserved for limited purposes, the users of new knowledge (where we do not make them artificially scarce by patents of monopoly) are unrestricted. Knowledge, once achieved, becomes gratuitously available for the benefit of all. It is through this free gift of the knowledge acquired by the experiments of some members of society that general progress is made possible, that the achievements of those who have gone before facilitate the advance of those who follow.

That’s from the great Friedrich von Hayek in the Constitution of Liberty.

Do People Intuitively Seek Government’s Help During Crisis? Not in Italy

noreply@blogger.com (benson_te) — Fri, 27 Jan 2012 11:26:00 +0000

A popular notion is that the default mode by the public during an economic crisis is to seek sanctuary in the nanny state.

But that’s not what seems to be happening in Italy.

From the Dollar Vigilante (via LewRockwell.com)

This week saw the launch of a popular uprising in Sicily, by a group known as the ‘Movimento dei Forconi’ or ‘Pitchfork Movement’. This is not an uprising of self absorbed youth who want more government handouts; but of producers who are being pushed into poverty by government taxes and regulation. The organizers are middle aged and older; this is significant, as most power and wealth is held by this generation and they have now drawn a line in the sand.

On the 16th of January these protesters began "Operazione Vespri Siciliani", a blockade of the Island of Sicily. Within two days the transportation of all goods was stopped. Over the next week, nothing entered or exited Sicily. This was no mean feat given that Sicily is not a small Island; it has a population of over five million people and a surface area of 25,711 km2.

These are some of their demands:

-The arrest of all corrupt politicians.

-To reduce the number of parliamentarians.

-To remove the provincial bureaucracy, as most of these politicians have been there for over forty years.

-To drastically cut the salaries and privileges of parliamentarians and senators.

-To restrict politicians two only two terms in office

Not one of Darth Monti’s “austerity” measures has touched the political caste; in fact in classic Italian style, the press has dug up some very dirty scandals concerning two of his fellow tax-feeders.

Read the rest here

Media and mainstream education has brainwashed the public to think that we should all run to the governments to seek refuge. In reality, the state operating on self-interests, use crisis as an excuse or opportunity to exploit on people’s fears which then gives them the rationale to expand power and control over society. In other words, crisis and wars are often used to justify the state’s predatory existence in the name of security and welfare.

And when economic imbalances exposes on the dysfunctional nature or the unsustainability of such systems, popular upheavals follows. The popular uprising in Sicily, which ironically demands for the reduction of government, appears to play into such motion.

Moreover, the upheaval looks very much a manifestation of the forces of decentralization gnawing at the foundations of the industrial age welfare state.

As Law Professor Butler Shaffer writes, (bold emphasis mine, italics original)

Alternative schooling, dispute resolution, and health-care practices; political secession and nullification movements; the decentralization of management in business organizations; news-reporting moving from the centrally-controlled, top-down model of traditional media, to the more dispersed, horizontally-networked Internet; individualized technologies such as personal computers, cell-phones, iPods, video cameras, and other innovations that enhance person-to-person communication, are just the more evident examples of how our social systems are undergoing constant centrifugation. If the successful practice, in a number of European cities, of abandoning government traffic signs in favor of a motorist-controlled system does not impress you, perhaps you will recall the collapse of the Soviet Union.

To express this phenomenon in terms of solid geometry, the pyramid is being replaced by the sphere. Plato’s hierarchically-structured world directed by philosopher-kings – long the favored model of the intellectual classes who fashioned themselves fit to sit at the institutional apex – has proven unfit for ordering the affairs of human beings. It is not better ideas that are transforming how we organize with one another, but real-world pragmatism: the life system simply cannot operate on the principle of being directed by centralized authorities!

So despite the mass media indoctrination, the technology enabled and facilitated horizontal flow of information, will impress upon the public of the mounting futility of centralized institutions. And such transition will be magnified by the persistence of the current crisis which may eventually lead to the collapse of welfare states.

Also this should extrapolate to a shift in people’s expectations on the role of the state.

US Senate Approves Debt Ceiling Increase

noreply@blogger.com (benson_te) — Fri, 27 Jan 2012 06:01:00 +0000

From the New York Times,

The Senate voted on Thursday to allow a further increase in the federal debt limit, permitting President Obama to borrow $1.2 trillion more to operate a government that spent about 55 percent more than it collected in revenue last year.

The 52-to-44 vote generally followed party lines, with Democrats supporting the increase in borrowing authority and Republicans opposed.

In the House last week, Republicans passed a “resolution of disapproval” to stop the increase in the debt limit. But the Senate refused on Thursday to take up that measure.

The upshot is that the debt limit will rise immediately to $16.4 trillion, from the current ceiling of $15.2 trillion.

Here is a very relevant quote from the great Professor Ludwig von Mises

What the doctrine of balancing budgets over a period of many years really means is this: as long as our own party is in office, we will enhance our popularity through reckless spending. We do not want to annoy our friends by cutting down expenditure. We want the voters to feel happy under the artificial short‑lived prosperity which the easy money policy and a rich supply of additional money generate.

Ever wonder why the world will continue to experience crisis after crisis?

Video: Stephen Roach: Central Bankers Pulling the Wool Over Our Eyes with ZIRP and Magical QE

noreply@blogger.com (benson_te) — Fri, 27 Jan 2012 05:36:00 +0000

[hat tip ZeroHedge]

In the interview with Bloomberg’s Tom Keene at Davos, Morgan Stanley Asia’s Stephen Roach is right to point out that central bankers have been pulling the wool over our eyes with ZIRP and magical QE, which for him does little to sustain economic recovery, and that central bankers have been mired in a policy trap—or commitments to up the ante on current policies to produce short term outcomes.

However Mr. Roach eludes the political aspects of why central bankers have been pulling the wool over our eyes with these monetary nostrums, which palpably has been designed to save the skins of bankers and their political patrons.

And Mr. Roach glosses over the fact that current monetary panacea, which have brought upon the 2008 crisis and which continues to linger today, has real effects to the economy, through accretion of imbalances or malinvestments which engenders another bust down the road. What this means is that boom bust cycles has distortive effects to a large segment of an economy.

Also policy traps are representative of the priorities of typical political agents.

Mr. Roach speaks highly of China’s fine tuning of monetary policies, which he believes the recent gamut tightening measures has been effective enough for the Chinese authorities to allow for policy accommodation under current conditions. Mr. Roach also hopes to see central bankers imbue on the traits of ex-US Federal Reserve chair Paul Volcker. Lastly Mr. Roach says that capitalism built on Greenspan’s policies had been misplaced.

I am sure that Paul Volcker is an exception to the norm, given the environment of the yesteryears, but am not sure if Paul Volker today would apply the same set of policies. In short, I am sceptical of the time consistency of Paul Volcker’s policies.

Further given that Chinese authorities has been operating on Keynesian guided policies, then same boom bust cycles will apply. So far real pool of savings in China has deferred on the day of reckoning, but current policies which extrapolate to capital consumption will eventually expose these imbalances.

Lastly with due respect to Mr. Roach, central banking, or the politicization of money, does not in any way embody capitalism. Remember half of every transactions facilitated by legal tender imposed medium isn’t one determined by the markets but by government.

And neither does Greenspan’s unregulated financial system which has been anchored on manipulating interest rates and bailouts, and whose regulations has been gamed by the political and banking class.

Capitalism does not prevent market from clearing excesses, but to the contrary induces such dynamics. The persistency of the 2008 crisis, which extends today, has been due to policies which has been preventing the required adjustments from previously acquired malinvestments and distortions.

War on Outsourcing: The Specter of US Economic Nationalism (Protectionism)

noreply@blogger.com (benson_te) — Thu, 26 Jan 2012 13:19:00 +0000

The Malaya reports

President Aquino appears unfazed by US President Barack Obama’s endorsement of House Bill No. 3596 or "Call Center and Consumers Protection Bill" pending in the US Congress saying it may be an election-related statement.

"We have to take into account that this is an election year but at the end of the day, like any other country, the US would want to make their companies more effective, more competitive, etc. and outsourcing is one of the keys towards that," Aquino said in an ambush interview at the EXL Service Philippines Site at the Mall of Asia in Pasay City.

"At this present time, I was made to understand, that this was an issue that was brought up during the last elections in America and from that time which was four years ago and now, the situation has not changed. Perhaps there isn’t that much of a danger," Aquino said.

"I will assume that it (BPO) will continue, hopefully it will not change because that is one of our sunrise industries," he said.

Aquino said there are no plans at the moment to lobby against the passage of the bill and that he prefers to "cross the bridge" only when the bill is passed.

It’s good to know that Philippine President Noynoy Aquino recognizes what looks like an election ploy. It really takes one to know one.

But it’s unfortunate that President Aquino, beneficiary of the outsourcing boom, would remain passive on this issue. Never mind if America’s turn to protectionism might indeed harm the industry. It would seem better to be bullied into submission. Yet fawn over with plans by the US to expand military presence here.

President Aquino doesn’t seem to realize that the divide-and-conquer and class warfare strategies have been the hallmark of the Obama administration.

As Mike Brownfield of the conservative Heritage Foundation writes,

Obama enacted a purely progressive agenda with his expansion of the state under Obamacare, his trillion-dollar stimulus bill, the government takeover of the auto industry, the proliferation of regulations under the Dodd-Frank regulatory reform bill, the crony capitalism of the Solyndra scandal, and the illegal appointments to the unrestrained Consumer Financial Protection Agency and the National Labor Relations Board. The result: Some 13.1 million Americans remain unemployed, job creation has been abysmal for much of the past three years, and the President’s promise to turn around the U.S. economy has gone unfulfilled.

The difference is that Mr. Obama’s progressive agenda, during this election season, seems to have transitioned from a moderate to hard line stance.

Maybe’s this also part of the desperation to get re-elected considering the Mr. Obama’s near record low approval rating. (chart from Gallup)

Yet here is more proof of President Obama's protectionist urge.

From the Wall Street Journal,

China was dragged into the 2010 U.S. midterm elections, and President Obama is busy ensuring that it will be an even bigger political target during the 2012 campaign. In Tuesday night's State of the Union address, the President joined Republican candidate Mitt Romney in singling out China as a special trade violator.

In announcing that he will set up a new Trade Enforcement Unit to investigate "unfair trade practices in countries like China," Mr. Obama is promising to increase investigations against Chinese exporters. His Administration has so far brought five cases against China in the World Trade Organization (WTO). Late last year it began targeting China's solar industry, while last week it said it would investigate Chinese makers of wind energy towers.

By the way one looks at it, protectionism has been rearing its ugly head as politicians like President Obama and the mainstream Republican candidates appeal to the emotions of the uninformed via nationalism/patriotism to solicit for their votes.

Many are unaware that economic nationalism (or protectionism) fundamentally underpins the philosophy of war or of military conflicts. World War II, for instance has mainly been caused by rabid nationalism.

Again current events have been affirming the admonitions of the great Ludwig von Mises,

Economic nationalism is incompatible with durable peace. Yet economic nationalism is unavoidable where there is government interference with business. Protectionism is indispensable where there is no domestic free trade. Where there is government interference with business, free trade even in the short run would frustrate the aims sought by the various interventionist measures…

What generates war is the economic philosophy almost universally espoused today by governments and political parties. As this philosophy sees it, there prevail within the unhampered market economy irreconcilable conflicts between the interests of various nations. Free trade harms a nation; it brings about impoverishment. It is the duty of government to prevent the evils of free trade by trade barriers. We may, for the sake of argument, disregard the fact that protectionism also hurts the interests of the nations which resort to it. But there can be no doubt that protectionism aims at damaging the interests of foreign peoples and really does damage them. It is an illusion to assume that those injured will tolerate other nations' protectionism if they believe that they are strong enough to brush it away by the use of arms. The philosophy of protectionism is a philosophy of war.

In short the President Obama’s war on outsourcing constitutes part of what seems to be an overall protectionist agenda, which translates to a war on trade against every nationality (including the Philippines).

President Aquino should negotiate to retain and expand free markets and abide by such principles. Otherwise, perhaps Marc Faber’s prediction may come true.

World Press Freedom Rankings: Philippines 140th

noreply@blogger.com (benson_te) — Thu, 26 Jan 2012 09:40:00 +0000

Reporters without borders recently released the Press Freedom index.

The press release goes…

This year’s index sees many changes in the rankings, changes that reflect a year that was incredibly rich in developments, especially in the Arab world,” Reporters Without Borders said today as it released its 10th annual press freedom index. “Many media paid dearly for their coverage of democratic aspirations or opposition movements. Control of news and information continued to tempt governments and to be a question of survival for totalitarian and repressive regimes. The past year also highlighted the leading role played by netizens in producing and disseminating news.

Crackdown was the word of the year in 2011. Never has freedom of information been so closely associated with democracy. Never have journalists, through their reporting, vexed the enemies of freedom so much. Never have acts of censorship and physical attacks on journalists seemed so numerous. The equation is simple: the absence or suppression of civil liberties leads necessarily to the suppression of media freedom. Dictatorships fear and ban information, especially when it may undermine them.

It is no surprise that the same trio of countries, Eritrea, Turkmenistan and North Korea, absolute dictatorships that permit no civil liberties, again occupy the last three places in the index. This year, they are immediately preceded at the bottom by Syria, Iran and China, three countries that seem to have lost contact with reality as they have been sucked into an insane spiral of terror, and by Bahrain and Vietnam, quintessential oppressive regimes. Other countries such as Uganda and Belarus have also become much more repressive.

This year’s index finds the same group of countries at its head, countries such as Finland, Norway and Netherlands that respect basic freedoms. This serves as a reminder that media independence can only be maintained in strong democracies and that democracy needs media freedom. It is worth noting the entry of Cape Verde and Namibia into the top twenty, two African countries where no attempts to obstruct the media were reported in 2011.

Read the rest here. I didn’t read through the entire report though as to how the press freedom is treated or measured in terms of the cyberspace or the netizens.

But in many instance where many (in the local community) seem to believe that there has been much press freedom in the Philippines, the rankings (140th out of 179) would give them a disappointment.

Press freedom represents an indispensable or sine qua non element for civil liberties, a representative government, and especially, for market economies (economic freedom or capitalism)

As the great Ludwig von Mises explains,

A free press can exist only where there is private control of the means of production. In a socialist commonwealth, where all publication facilities and printing presses are owned and operated by the government, there cannot be any question of a free press. The government alone determines who should have the time and opportunity to write and what should be printed and published. Compared with the conditions prevailing in Soviet Russia, even Tsarist Russia, retrospectively, looks like a country of a free press. When the Nazis performed their notorious book auto-da-fes, they exactly conformed to the designs of one of the great socialist authors, Cabet.

As all nations are moving toward socialism, the freedom of authors is vanishing step by step. From day to day it becomes more difficult for a man to publish a book or an article, the content of which displeases the government or powerful pressure groups. The heretics are not yet "liquidated" as in Russia nor are their books burned by order of the Inquisition. Neither is there a return to the old system of censorship. The self-styled progressives have more efficient weapons at their disposal. Their foremost tool of oppression is boycotting authors, editors, publishers, booksellers, printers, advertisers, and readers.

A US-Philippines Bases Treaty (2012 Edition) in the Making?

noreply@blogger.com (benson_te) — Thu, 26 Jan 2012 06:43:00 +0000

From the Washington Post,

Two decades after evicting U.S. forces from their biggest base in the Pacific, the Philippines is in talks with the Obama administration about expanding the American military presence in the island nation, the latest in a series of strategic moves aimed at China.

Although negotiations are in the early stages, officials from both governments said they are favorably inclined toward a deal. They are scheduled to intensify the discussions Thursday and Friday in Washington before higher-level meetings in March. If an arrangement is reached, it would follow other recent agreements to base thousands of U.S. Marines in northern Australia and to station Navy warships in Singapore.

Among the options under consideration are operating Navy ships from the Philippines, deploying troops on a rotational basis and staging more frequent joint exercises. Under each scenario, U.S. forces would effectively be guests at existing foreign bases.

The sudden rush by many in the Asia-Pacific region to embrace Washington is a direct reaction to China’s rise as a military power and its assertiveness in staking claims to disputed territories, such as the energy-rich South China Sea.

“We can point to other countries: Australia, Japan, Singapore,” said a senior Philippine official involved in the talks, speaking on the condition of anonymity because of the confidentiality of the deliberations. “We’re not the only one doing this, and for good reason. We all want to see a peaceful and stable region. Nobody wants to have to face China or confront China.”

The strategic talks with the Philippines are in addition to feelers that the Obama administration has put out to other Southeast Asian countries, including Vietnam and Thailand, about possibly bolstering military partnerships.

What seems to be the common denominator between now and two decades ago when the Bases Extension Treaty was rejected by the Philippine Senate?

Well both has the Aquino administration (mother and son) taking on the side of—or has fought for an extension of—US foreign policy in the country.

Not that this about the Aquino administration being an American stooge, although they may well be, but about the developing trend in US foreign policy and the possible implications here.

Obama’s foreign policy has increasingly been militant just as the Presidential election approaches.

Last night at the State of the Union address President Obama threatened Iran with ‘no options off the table’ rhetoric. In addition, President Obama seems to having an on-off or love-hate affair with China with the latter being painted as a potential adversary.

Military aggression as China’s foreign policy path is unlikely, despite some caustic international incidences at the Spratlys Island.

As pointed out before, such incidences could be indicative of China’s reaction to what seems to be an encirclement strategy being applied by the US and or the heated rhetoric by President Obama of charging China as a currency manipulator.

Also China could testing the responses of her neighbors to see where their loyalty lies and to what degree they have been, which could be part of 37 war strategies of “beating the grass to startle the snake strategy”, or that China could be flaunting her new weapons to signal her newfound geopolitical muscle.

But most importantly, I think China could be using the Spratlys to gain negotiation leverage.

In politics, what you see is hardly what you get.

Nevertheless, actions serve as best indicators of intent or what Austrian economists calls as the demonstrated preference.

China won’t likely kill the proverbial goose that lays the golden eggs for the simple reason that China’s trade with the region has been burgeoning substantially. (charts above from ADB)

To add, China has even taken further steps to increase the usage of her country’s currency as the region’s medium of exchange in the path towards regional integration.

China will surely not attain integration by invading her neighbors. Two major World Wars of the 20^th century should serve as painful lessons.

Integration can only be achieved through social cooperation via the division of labor or free trade.

And unless China’s leaders have lost their senses, perhaps out of desperation or becomes mentally deranged, a bellicose foreign policy would translate to their political suicide considering that today’s state of warfare. So this isn’t a rational or even a viable option.

In addition, the thought of foreign bases as functional deterrent to military aggression is essentially obsolete in a nuclear war.

In reality, military bases have mostly been used as a staging point for political interventions in local affairs and for justifying the maintenance and or growth of the defense budget for the US federal government.

And importantly, encirclement strategies to contain China’s so-called growing military capability are not helpful, they signify signs of (US) insecurity that only promotes antagonism that could lead to genuine confrontation.

The point is, any military base agreements will serve as a magnet for any prospective war or military hostility, incentivize more foreign interventions in local (Philippine) affairs and would create social friction between the average Filipinos and US military.

Military bases for whose benefit?

Again as stated earlier, wars benefit the military industrial complex who as rent seekers, needs politics induced wars to sell their products and services to generate profit. Peace is an anathema to them.

War and imperialist policies also benefit the (local and foreign) political class who use wars (or the threat of wars) to expand to control over society through various interventions and taxation, to curb civil liberties, and to justify the budgets extracted from society for their personal benefits.

As Murray N. Rothbard once wrote,

Imperialism will ensure for the United States the existence of perpetual "enemies," of waging what Charles A. Beard was later to call "perpetual war for perpetual peace." For, Flynn pointed out, "we have managed to acquire bases all over the world…. There is no part of the world where trouble can break out where… we cannot claim that our interests are menaced. Thus menaced there must remain when the war is over a continuing argument in the hands of the imperialists for a vast naval establishment and a huge army ready to attack anywhere or to resist an attack from all the enemies we shall be obliged to have

Video: Cato Institute on Obama's State of the Union Address

noreply@blogger.com (benson_te) — Thu, 26 Jan 2012 03:59:00 +0000

Cato experts straighten out many of the twisted political statements made by US President Obama at last night's State of the Union address.

To quote George Orwell on "BlackWhite" (bold emphasis mine)

this word has two mutually contradictory meanings. Applied to an opponent, it means the habit of impudently claiming that black is white, in contradiction of the plain facts. Applied to a Party member, it means a loyal willingness to say that black is white when Party discipline demands this. But it means also the ability to believe that black is white, and more, to know that black is white, and to forget that one has ever believed the contrary. This demands a continuous alteration of the past, made possible by the system of thought which really embraces all the rest, and which is known in Newspeak as doublethink.

As exposed above politicians are very good at propagating doublethink.

Gold Reclaims $1,700 level, US Federal Reserve Promises Low Rates Until 2014

noreply@blogger.com (benson_te) — Thu, 26 Jan 2012 02:40:00 +0000

As I keep saying, global central banks will continue to flood the system with a tsunami of liquidity, and this will be spearheaded by the US Federal Reserve.

And like a messiah, Ben Bernanke delivers the much sought after manna (stimulus bonanza) to her drooling followers (financial markets) as captured earlier by media’s sentiment, by promising to extend zero bound rates from 2013 until 2014.

From the Bloomberg,

“Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability,” the panel said in a statement. It also enhances “the committee’s ability to promote maximum employment in the face of significant economic disturbances.”

Policy makers declined to specify a goal for employment, saying that it “is largely determined by non-monetary factors.” The committee’s longer-run forecast for the jobless rate is 5.2 percent to 6 percent….

“The Committee expects to maintain a highly accommodative stance for monetary policy,” the FOMC said in a statement. “Economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

Of course this will be on top of the existing ones.

From the same report,

The Fed said it would continue to extend the average maturity of its $2.6 trillion securities portfolio, a move dubbed “Operation Twist.” The Fed also maintained its policy of reinvesting maturing housing debt into agency mortgage-backed securities.

Bernanke said that the extension of the “expected point of takeoff” for rising interest rates to 2014 implies that asset sales by the Fed would occur “later than previously thought,” and “presumably in 2015.”

The Fed vernacular about “asset sales” is actually a flimflam; financial markets as well as the financial and banking industry have been deeply conditioned or addicted to sustained injections of liquidity, where any reversal will only lead to intensive convulsions, a scenario which defeats or neutralizes the very intent of the current measures. Thus, the trajectory of central bank actions have greatly been tilted towards sustained inflationism.

This is because the FED officials (and the other central bankers) believes that they can manipulate interest rates with continuing success and without adverse consequences.

As the great Ludwig von Mises wrote, (bold emphasis mine)

The hindrance that the monetary or circulation credit theory had to overcome was not merely theoretical error but also political bias. Public opinion is prone to see in interest nothing but a merely institutional obstacle to the expansion of production. It does not realize that the discount of future goods as against present goods is a necessary and eternal category of human action and cannot be abolished by bank manipulation. In the eyes of cranks and demagogues, interest is a product of the sinister machinations of rugged exploiters. The age-old disapprobation of interest has been fully revived by modern interventionism. It clings to the dogma that it is one of the foremost duties of good government to lower the rate of interest as far as possible or to abolish it altogether. All present-day governments are fanatically committed to an easy money policy

And true to the wisdom of Professor Mises, the policy of interest rate manipulation (to keep interest rates as low as far as possible or for its abolishment) has represented a deeply embedded creed or doctrine which central bankers worldwide piously apply.

Yet considering that every action has corresponding intertemporal consequences, the beneficial effects of the current measures will eventually be exposed as a quack.

And I think such dynamic is being revealed by the actions in the gold market.

Yet contrary to popular mainstream claims that the recent selloff constituted the “end of the bull market” (such as George Soros and Dennis Gartman who eventually flip flopped), gold prices has been affirming my rejoinder that it hasn’t.

Gold prices has reclaimed the $1,700 level!

Again, profit from political folly.

Quote of the Day: No Progress (on Liberty) Without Struggle!

noreply@blogger.com (benson_te) — Wed, 25 Jan 2012 12:02:00 +0000

Let me give you a word of the philosophy of reform. The whole history of the progress of human liberty shows that all concessions yet made to her august claims, have been born of earnest struggle. The conflict has been exciting, agitating, all-absorbing, and for the time being, putting all other tumults to silence. It must do this or it does nothing. If there is no struggle there is no progress. Those who profess to favor freedom and yet depreciate agitation, are men who want crops without plowing up the ground, they want rain without thunder and lightening. They want the ocean without the awful roar of its many waters.

This struggle may be a moral one, or it may be a physical one, and it may be both moral and physical, but it must be a struggle. Power concedes nothing without a demand. It never did and it never will. Find out just what any people will quietly submit to and you have found out the exact measure of injustice and wrong which will be imposed upon them, and these will continue till they are resisted with either words or blows, or with both. The limits of tyrants are prescribed by the endurance of those whom they oppress...

Men may not get all they pay for in this world; but they must certainly pay for all they get. If we ever get free from the oppressions and wrongs heaped upon us, we must pay for their removal. We must do this by labor, by suffering, by sacrifice, and if needs be, by our lives and the lives of others.

-Frederick Douglass from An address on West India Emancipation (08-04-1857)-Wikipedia. Also Frederick Douglass on Slavery and Civil War: Selections from His Writings [hat tip Justin Ptak, Mises Blog]

Iran to Trade Oil for Gold to Bypass Sanctions

noreply@blogger.com (benson_te) — Wed, 25 Jan 2012 09:01:00 +0000

Iran reportedly plans to skirt US and Euro sanctions by trading her oil for gold with India and China

From Debka.com (hat tip lewrockwell)

India is the first buyer of Iranian oil to agree to pay for its purchases in gold instead of the US dollar, DEBKAfile's intelligence and Iranian sources report exclusively. Those sources expect China to follow suit. India and China take about one million barrels per day, or 40 percent of Iran's total exports of 2.5 million bpd. Both are superpowers in terms of gold assets.

By trading in gold, New Delhi and Beijing enable Tehran to bypass the upcoming freeze on its central bank's assets and the oil embargo which the European Union's foreign ministers agreed to impose Monday, Jan. 23. The EU currently buys around 20 percent of Iran's oil exports.

The vast sums involved in these transactions are expected, furthermore, to boost the price of gold and depress the value of the dollar on world markets.

Iran's second largest customer after China, India purchases around $12 billion a year's worth of Iranian crude, or about 12 percent of its consumption. Delhi is to execute its transactions, according to our sources, through two state-owned banks: the Calcutta-based UCO Bank, whose board of directors is made up of Indian government and Reserve Bank of India representatives; and Halk Bankasi (Peoples Bank), Turkey's seventh largest bank which is owned by the government.

If the major reason the US pushed for the invasion of Iraq and the overthrow of the Saddam Hussein regime was because latter had pushed for Iraq’s oil to be paid in Euros is true, then Iran’s oil for gold trade will likely presage a shared fate with her neighbor.

The other aspect here is the potential use of gold as money for transactions outside the incumbent banking-financial and political system or in the informal economy.

But of course, governments have already been restricting international gold flows. For instance South Korean authorities recently arrested men who tried to smuggle out gold by hiding it in their rectums.

Interesting signs of times.

Update: A source suggests that the DEBKA files or the source of the quoted news is run by Council of Foreign Relations (CFR), believed to a conspiracy group whose aim has supposedly been to uphold the interests of some well connected elites via control of governments, and some other network of war hawks. CFR has called for a war on Iran.

The implication is that I am not sure whether the news cited above represents a propaganda or a reported fact.

Saber Rattling over Iran is only Part of the Big Oil Price Story

noreply@blogger.com (benson_te) — Wed, 25 Jan 2012 07:54:00 +0000

Dr. Ed Yardeni writes at his blog,

Despite Iran’s saber rattling, the price of oil hasn’t soared. The price of a barrel of Brent has been hovering around $110 since last summer. That’s even after President Barack Obama signed a bill imposing tougher sanctions on Iran at the end of last year. The price didn’t go up after the Iranians publicly threatened to close the Strait of Hormuz and warned Saudi Arabia not to fill any expected gap in oil demand when the world stops buying Iranian crude. According to a report in today’s Al Arabiya News, Iranian boats with men armed with machine guns on board were recently sent to the waters near the Saudi oil-production areas. Yet the price of oil hasn’t budged much from $110. Spain’s foreign minister said on Monday that Saudi Arabia has promised that it will make up for supplies of oil lost as a result of EU sanctions on Iran, and will do so at the same price.

If it weren’t for all the saber rattling, the price of oil would probably be falling.

Saber rattling over Iran represents only a fragment of the big picture. In other words, the Iran controversy does not capture the major elements of oil politics which drives oil prices.

In examining the political structure of major oil producing economies, we find that there is a watershed level for these welfare states to survive, for instance Saudi Arabia requires some $88 per barrel to buy off their people, Iran some $ 80 per barrel and etc…

In short, anytime oil prices go below these threshold levels, you can expect the “Arab Spring” revolts to make a rip-roarin’ comeback.

So as with the politics of subsidized renewable energy. Aside from environmental concerns, alternative energy requires elevated oil prices to remain an “attractive” alternative.

As this article from Scientific American says,

Today renewable technologies such as wind and solar are close to being competitive with fossil fuels. But we can say good-bye to that prospect if oil prices decline to $60 to $70 a barrel, which could easily happen in a recession, as we witnessed in October.

This means that many entrenched political groups (and their business allies or associates) are dependent on high oil prices.

From the above we come to the following conclusion

-Free markets don’t drive oil prices. Or that oil prices are greatly influenced by the political setting of mainly the oil producers (not on Iran alone).

-To maintain or preserve the current political environment, particularly welfare states of oil producing nations and the promotion of green energy, political measures would need to be resorted to in order to bring about the required oil threshold levels.

Such political measures will possibly include saber rattling (brinkmanship) politics, various market interventions by governments (to restrict supplies) as the Keystone Pipeline Controversy [also remember that 80% of oil reserves are held by governments or National Oil companies, so supply is very much sensitive to actions of political leaders since they control a significant majority of world's reserves], and importantly for global central banks to ramp up on money supply.

As you can see plainly looking at barrels consumed and barrels produced alone is grossly an insufficient way to study and assess oil economics. That’s because politics has an immense influence on how oil prices are being shaped.

Video: Amazing YouTube Statistics

noreply@blogger.com (benson_te) — Wed, 25 Jan 2012 06:03:00 +0000

This is a terse video on some amazing YouTube statistics. This only shows how social media networks, like YouTube, has been reconfiguring our lives.

More from onehourpersecond.com (hat tip Professor Mark Perry)

How Economic Freedom Erodes India’s Caste System

noreply@blogger.com (benson_te) — Wed, 25 Jan 2012 05:58:00 +0000

From Economic Times India, (bold emphasis mine)

On the face of it, entrepreneur Ashok Khade is just another one of India's growing wealthy, heading a successful $27 million infrastructure and oil and gas business group that employs 4,500 people.

But the 56-year-old is a rarity, as he belongs to India's dalit, or "untouchable" classes, who for centuries have been anchored at the bottom of Hinduism's caste system and remain among the most exploited and despised.

The opening up of India's economy has helped bring in some mobility in the rigid social hierarchy, leading to a gradual rise in jobs and opportunities for India's poorest and even created a new breed -- the dalit millionaire.

Khade, a first-generation businessman who now drives a BMW, battled poverty and discrimination as a child in a village near Sangli in Maharashtra state, about 400 kilometres (250 miles) from India's financial hub, Mumbai.

Not only has economic freedom been expanding people’s choice—to avail of or harness more economic opportunities—for them to advance (unless they are mentally resigned to comply with local customs), but has also been instrumental in reducing class discrimination or class inequalities by providing “some mobility in the rigid social hierarchy”. In short, economic freedom and free trade changes culture.

Quote of the Day: Nationalism

noreply@blogger.com (benson_te) — Tue, 24 Jan 2012 13:27:00 +0000

And this is what nationalism seems to mean. The individual gives up the effort to treat the world, material or human, as his oyster, and tries to put himself in mystical unity with his group, meaning the more or less racial, cultural “nation” which is already the object of his strongest political allegiance. Along with this growth in a kind of sentimental gregariousness, he swings from an active to a passive attitude toward society, and from a reflective to an emotional, impulsive attitude toward the world at large. He swings from “rationalism” to “romanticism.” In particular, the individual reacts from the notion of reaching validity by general discussion – which he has seen degenerate into a contest in “selling” – to a faith in “strong” individual leadership, which also represents a reaction from moral and intellectual equalitarianism to hero worship. The movement also involves a shift from the actor interest to the spectator interest in society, and in part to a merging of the two in an experience of mystical participation. Men want action, but by the group, i.e., the government or its outstanding personalities. They do not want to act.

That’s from economist Frank Knight in a 1934 essay called “Economic Theory and Nationalism”.

According to the source of the quote, Professor Donald Boudreaux, this is from page 322 of the 1951 Augustus M. Kelly reissue of Frank Knight‘s 1935 collection The Ethics of Competition where the essay was published.

Mobile Internet: Welcoming Dr. Smartphone?

noreply@blogger.com (benson_te) — Tue, 24 Jan 2012 13:17:00 +0000

I think the major springboard in the next wave of advances in the technology sector will be in the applications aspects of the mobile internet platform.

Aside from games, mobile health services along with Mobile banking and mobile commerce are likely the high growth areas to watch.

In terms of healthcare here is a clue where application development trends are headed for, from Reuters

Tired of long waits at the hospital for medical tests? If Korean researchers have their way, your smartphone could one day eliminate that -- and perhaps even tell you that you have cancer.

A team of scientists at Korea Advanced Institute of Science of Technology (KAIST) said in a paper published in Angewandte Chemie, a German science journal, that touch screen technology can be used to detect biomolecular matter, much as is done in medical tests.

"It began from the idea that touch screens work by recognizing the electronic signs from the touch of the finger, and so the presence of specific proteins and DNA should be recognizable as well," said Hyun-gyu Park, who with Byong-yeon Won led the study.

The touch screens on smartphones, PDAs or other electronic devices work by sensing the electronic charges from the user's body on the screen. Biochemicals such as proteins and DNA molecules also carry specific electronic charges.

According to KAIST, the team's experiments showed that touch screens can recognize the existence and the concentration of DNA molecules placed on them, a first step toward one day being able to use the screens to carry out medical tests.

As I have been saying, the information or digital age will change or reconfigure the way we do things.

Media Abuzz with Prospective QEs (by the FED and the ECB)

noreply@blogger.com (benson_te) — Tue, 24 Jan 2012 12:41:00 +0000

Speaking of central banks determining market actions, it would seem that the mainstream (media, investors, academe, institutional analysts and other market participants) has been all over calling for the next wave of interventions.

From the Newsmax

Consensus is building fast that the Federal Reserve will roll out a third round of quantitative easing, possibly as high as $1 trillion and likely by the end of January, economists say.

The Fed has already carried out two rounds of quantitative easing, in which it buys assets from banks with freshly printed money with the aim of steering the economy away from deflation and contraction.

The Federal Open Market Committee, which sets monetary policy, meets next Tuesday and Wednesday and a decision could come then.

While improving economic indicators had many believing a third round, known as QE3 wouldn't be necessary, a slumping housing sector and the onset of recession in Europe may prove otherwise.

I know, there has been a lot of talk of QE3.0 since the last semester of 2010, but an official QE 3.0 has yet to be announced.

Yet as I keep pointing out, QE 3.0 has already been happening, as the Federal Reserve’s balance sheet began expanding at the start of last December. Perhaps this could be part of the backdoor bailout of the Eurozone being conducted via foreign exchange swaps between the ECB and the US Federal Reserve.

The resonant call for more interventionism has been the same in the Eurozone.

From Bloomberg,

European banks, shunned by investors and each other, may borrow as much next month from the European Central Bank as they did in a record offering in December as they seek refuge from frozen funding markets.

The ECB last month lent banks an unprecedented 489 billion euros ($637 billion) for three years. Analysts said they expect demand to be just as high at a second auction on Feb. 29 because the stigma associated with using the facility is dissipating and the list of what assets can be used as collateral in exchange for the loans will be extended. ECB President Mario Draghi said last week he expects demand for loans next month to be “still very high,” though “probably lower than in December.”

“February’s second three-year Long Term Refinancing Operation looks set to be extremely large,” Credit Suisse Group AG analysts led by William Porter wrote in a report to clients. “The last LTRO has removed any stigma, making managements who do not exploit the value on offer arguably careless at best.”

The ECB is flooding the banking system with cheap money in a bid to avert a credit crunch after the market for unsecured bank debt seized up and funding from U.S. money markets dries up. Politicians, including French President Nicolas Sarkozy, are pushing the banks to use the loans, which carry an interest rate of 1 percent, to buy higher-yielding southern European sovereign debt, thereby forcing down borrowing costs in the region.

The actions of central bank have consequences. Money printed from thin air will find their way into the markets and the economy on a distinct level and timing of impact. And making comparisons with any recent historical accounts are unjustified for the simple reason that the current wave of central bank interventions has been unprecedented.

As the great Ludwig von Mises explained in Theory of Money and Credit, (bold emphasis mine)

A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, i.e., of antidemocratic, policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them. That is the political function of inflation. It explains why inflation has always been an important resource of policies of war and revolution and why we also find it in the service of socialism. When governments do not think it necessary to accommodate their expenditure to their revenue and arrogate to themselves the right of making up the deficit by issuing notes, their ideology is merely a disguised absolutism.

And part of the communications tool used by central banks to manage inflation expectations is called signaling channel. Hence we are currently being conditioned to accept inflationism as the only viable recourse to the present dilemma.

Year of the Dragon: A Stock Market Boom?

noreply@blogger.com (benson_te) — Tue, 24 Jan 2012 09:50:00 +0000

The Economist says that the year of the Dragon will bring good fortune to stock market investors.

That would be nice to hear.

Here’s the Economist,

CHINESE people across the world ushered in their new year on January 23rd, which according to 3,000 year-old Chinese astrology is the year of the dragon. This critter is not a mythical beast. Physignathus cocincinus, to give its Latin name, is associated with power, authority and good fortune. For those looking for good news among the grim January headlines, this could bode well for stockmarket fortunes over the coming year. Between 1900 and 2011, the nine previous dragon years have seen America's Dow Jones Industrial Average price index increase by an average of 7.7% in real terms, the second-best historical record of the 12 zodiac animals. Such fortune may be short-lived however; next year's animal, the snake, has the second-worst historical record.

My view is that the illustrated stock market returns has been coincidental, and has little to do with the fortune cookie from the year of the Dragon.

This is an example of the penchant to look for patterns or correlations to justify or rationalize a bias. Other daffy examples are: Sports Illustrated Swimsuit Issue, Skirt Theory, Super Bowl, Lipstick and more...

Instead, the politicized nature of the global stock markets implies that the collective actions of the US Federal Reserve's Ben Bernanke, ECB’s Mario Draghi, BoE’s Mervyn King, BoJ’s Masaaki Shirakawa and the central bankers of other major economies will serve as one of the major pillars in shaping investor returns this year.

The others you can read here

Coming War on Iran: Europe Bans Oil Imports from Iran

noreply@blogger.com (benson_te) — Tue, 24 Jan 2012 07:47:00 +0000

The US has been tightening the screw around Iran’s neck.

And as earlier postulated, part of the bailout package of the Eurozone comes with conditions for Europe to apply sanctions on Iran. I seem to have been validated

From the Wall Street Journal

The European Union approved a ban on oil imports from Iran, overcoming misgivings about the economic hardship of its members to take its strongest measures yet to press Tehran into concessions on its nuclear program.

News of a coming embargo by Iran's largest oil-export market shocked the country's troubled economy. Iran's currency, the rial, fell 10% to a record low on Monday, while gold prices rose.

The ban is set to take effect on July 1, following a review to ensure the weaker EU economies can find, and afford, new sources of oil. The EU also agreed to freeze the assets of Iran's central bank, the conduit for the country's oil revenue, and ban trade with its petrochemical industry.

"Our message is clear. We have no quarrel with the Iranian people," the leaders of France, Germany and the U.K. said. "But the Iranian leadership has failed to restore international confidence in the exclusively peaceful nature of its nuclear program. We will not accept Iran acquiring a nuclear weapon."

Iran's Deputy Foreign Minister Abbas Araghchi said sanctions made Iran's conflict with the West tougher to resolve.

"The more they go down this path, the more obstacles we will have for reaching a final agreement," Mr. Araghchi told IRNA, Iran's official news agency.

The Obama administration applauded the EU decision on Monday and backed it up by blacklisting Iran's third-largest bank, Bank Tejarat, one of Tehran's few remaining conduits for trade with the West.

And instead of pressuring the leadership, as Presidential aspirant Ron Paul predicted, the average Iranians appear to be redirecting their frustrations at the US.

Again from the same article,

Iranians contacted Monday reacted with anger at news of the embargo, saying the people would suffer more than the government, amid rising inflation levels.

"These sanctions are affecting everyone's daily lives. I wish our government would put the good of 75 million people ahead of its pride and compromise," said an engineer in Tehran.

What the US (and Israel) would now be waiting for now is a Casus Belli (justification for acts of war: Wikipedia.org). And a beleaguered Iran may just oblige.

War is a diversionary ploy used by politicians to advance their self-interests.

I see the US political brinkmanship as an important variable to the coming US presidential election, and importantly, as pretext or justification to raise debt ceiling levels and to monetize US debts.

Keystone Pipeline Controversy: Warren Buffett Profits from Obama’s Policies

noreply@blogger.com (benson_te) — Tue, 24 Jan 2012 06:35:00 +0000

From Bloomberg,

Warren Buffett’s Burlington Northern Santa Fe LLC is among U.S. and Canadian railroads that stand to benefit from the Obama administration’s decision to reject TransCanada Corp. (TRP)’s Keystone XL oil pipeline permit.

With modest expansion, railroads can handle all new oil produced in western Canada through 2030, according to an analysis of the Keystone proposal by the U.S. State Department.

“Whatever people bring to us, we’re ready to haul,” Krista York-Wooley, a spokeswoman for Burlington Northern, a unit of Buffett’s Omaha, Nebraska-based Berkshire Hathaway Inc. (BRK/A), said in an interview. If Keystone XL “doesn’t happen, we’re here to haul.”

The State Department denied TransCanada a permit on Jan. 18, saying there was not enough time to study the proposal by Feb. 21, a deadline Congress imposed on President Barack Obama. Calgary-based TransCanada has said it intends to re-apply with a route that avoids an environmentally sensitive region of Nebraska, something the Obama administration encouraged.

The rail option, though costlier, would lessen the environmental impact, such as a loss of wetlands and agricultural productivity, compared to the pipeline, according to the State Department analysis. Greenhouse gas emmissions, however, would be worse.

If completed, Keystone XL would deliver 700,000 barrels a day of crude from Alberta’s oil sands to refineries along the Gulf of Mexico, crossing 1,661 miles (2,673-kilometers) over Montana, South Dakota, Nebraska, Kansas, Oklahoma and Texas.

I am more convinced that Mr. Buffett’s investing strategy has been overhauled, from value to political entrepreneurship (cronyism).

Considering Mr. Buffett’s age, perhaps his desire to get continued accolades from the investing world by generating exemplary returns on investment, has become the highest priority. In short, I think Mr. Buffett’s ego has been prevailing over his former style. And a higher time preference for Mr. Buffett’s translates to a portfolio with greater exposures on short term positions (theoretically extrapolates to higher risks).

And aside from the narrowing windows of patience, Mr. Buffett perhaps recognizes the potential blowback from the economic medicine analogy which he often uses to justify government’s intervention in the economy.

In his flagship company, Berkshire Hathaway’s 2009 shareholder meeting Mr. Buffett said,

Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once unthinkable dosages will almost certainly bring on unwelcome after-effects. Their precise nature is anyone's guess, though one likely consequence is an onslaught of inflation.

Such environment would stymie ROIs.

So given the current circumstances, one major way to preserve his reputation would be to take on the political route to squeeze out ALPHA [return in excess of the compensation for the risk borne-wikipedia.org]: lobby and use the government policies to put a kibosh on prospective competition.

At the same time, political privileges not only reduces the short term risks but also provides profits to his company whom has been positioned to profit from policies of 'economic medicines' running on huge dosages (inflationism).

We have accounted for Mr. Buffett’s embrace of cronyism where has previously profited from bank bailouts.

Obama’s policy of “picking winners” in denying the permit for Keystone pipeline project has favored Mr. Buffett’s interests.

And to reciprocate, it’s no wonder the Sage of Omaha has been fervently campaigning for President Obama’s reelection bid, where Mr. Buffett has been one of Obama's major fundraiser.

Nassim Taleb on the Party Skills of Entrepreneurs

noreply@blogger.com (benson_te) — Mon, 23 Jan 2012 16:50:00 +0000

Why are entrepreneurs less glib in party conversations? Because they are doers and less of talkers. That’s how I interpret the impromptu and thought provoking post of one of my favorite author, Nassim Taleb on his Facebook wall.

I believe that education is mostly what make individuals more polished dinner partners. The British government documents, as early as fifty years ago, present another aim for education than the one we have today: raising values, making good citizens, and “the intrinsic value of learning”, not economic growth.

Likewise in ancient times, learning was for learning’s sake, to make someone a good person, worthy talking to; it was not for the vulgar aim to enhance the stock of gold in the city’s coffers. I will say it bluntly: entrepreneurs, particularly those in technical jobs are not necessarily the best people to have dinner with —the better at they are doing, the worst they tend to be (with some exceptions, of course).

I recall a heuristic I used in my previous profession when hiring people (called in Fooled by Randomness “separate those who when they go to a museum look at the Cézanne on the wall from those who focus on the contents of the trash can”): the more interesting their conversation, the more cultured they were, the more we are trapped at thinking that they are effective at what they were doing (something psychologists call the halo effect, the mistake in thinking that skills in, say, skiing translate into skills in managing a pottery workshop or a bank department). Clearly, it is unrigorous to judge the skills at doing from the skills at the talking (the same conflation of event and exposure, or knowing with doing, or, more mathematically, mistaking the x for f(x)), good traders can be totally incomprehensible —they do not put much energy in turning their insights and internal coherence into elegant style.

Entrepreneurs are selected to be just doers, not thinkers, and doers do, don’t talk, and it would be unfair, wrong, and downright insulting to measure them at the talk department. The same with artisans: the quality lies in their product, not their conversation —in fact they can easily have false beliefs that lead them to make better products, so what? But we should avoid the mental leap of going from the idea that making people interesting dinner partners to the notion that it creates economics growth, or that we should increase the stock of bureaucrats for that. Bureaucrats on the other hand, because of the lack of objective metric of success and absence of market forces, are selected on “hallo effects” of shallow looks and elegance —just say that a dinner with empty suits working for the World Bank would be more interesting than one with some of Fat Tony’s cousins.

The prolific Mr. Taleb seems to be distinguishing substance from form where he opines that measuring people by their social skills can be misleading or deceiving.

Doers (entrepreneurs, particularly technical entrepreneurs) may not be socially impressive but play a more prominent role in the economy. The tradeoff for the entrepreneurs: scarce time (and resources) are devoted to delivering the satisfaction of the consumers or clients than to spend unproductive time at social affairs. (though, we can’t generalize this, as some entrepreneurs can be sleek conversationalists and not all glib talkers are unproductive)

This is especially true compared to “halo effects” projected by bureaucrats and politicians who use emotionally driven rhetorical abstractions to gain sympathy and approbation of the unenlightened and of the boobus voters. Yet ironically these political agents lives off from the blood of their hosts—the entrepreneurs.

Also this quote may reflect on Mr. Taleb’s personal circumstance as a mathematician-philosopher. Perhaps if I read Mr. Taleb right, then I would share his frustrations: Talkers (like celebrity guru and insider Mr. Nouriel Roubini) get the chicks! [But that represents a choice: perhaps one needs to balance between social life and delivering value to clients/consumer.]

To summarize: in parties or in social gathering, what you see or hear isn’t what you get (in most instances).

Sweden’s Free No-Classroom Schools

noreply@blogger.com (benson_te) — Mon, 23 Jan 2012 09:00:00 +0000

A private school in Sweden jettisons the conventional classroom based education

From the Businessinisder,

A new school system in Sweden eliminated all of its classrooms in favor of an environment that fosters children's "curiosity and creativity."

Vittra, which runs 30 schools in Sweden, wanted learning to take place everywhere in its schools -- so it threw out the "old-school" thinking of straight desks in a line in a four-walled classroom (via GOOD).

Vittra most-recently opened Telefonplan School, in Stockholm. Architect Rosan Bosch designed the school so children could work independently in opened-spaces while lounging, or go to "the village" to work on group-projects.

All of the furniture in the school, which looks like a lot of squiggles, is meant to aid students in engaging in conversation while working on projects.

The school is non-traditional in every sense: there are no letter grades and students learn in groups at their level, not necessarily by age.

Admission to the school is free, as long as the child has a personal number (like a social security number) and one of the child's parents is a Swedish tax payer.

As I have been continuously pointing out, the information or digital age will radically change the way we live or do things.

And the secular trend will evolve towards the personalization of educational services. And moving away from the classroom model, as the above, is just an example of such transition. Aside, online platforms, and other competition-driven innovations will drive such transformations that will send the current firmament high costs of (industrial era designed) education spiraling down.

Pivotal changes happen at the fringes. As I earlier pointed out the Khan Academy’s P2P collaborative tutoring, free online education as the University of People and Stanford University’s expanding online courses could be representative of the early movers.

And as the cost of education falls, knowledge will surge. Thus, the knowledge revolution will serve as the critical backbone to decentralization trends.

Quote of the Day: Wealth is about Value

noreply@blogger.com (benson_te) — Mon, 23 Jan 2012 03:45:00 +0000

Wealth is merely the ability to get things that we want. Since most of us are not independently wealthy, we have to work to create things that other people want in order to get what we want. The most common way to do this since the dawn of the industrial revolution has been to work for someone who needs human labor to accomplish some end–an end that is valued by consumers…

The point is, our goal should never be to “create jobs”. Our goal should be to enable people to contribute something valued by other people. The value is the point, not the work. If someone finds a way to provide value to hundreds of millions of people and it requires no more effort from them than batting their eyelashes, that would be a win.

That’s from Adam Gurri (hat tip Don Boudreaux). We should emphasize on providing values and not just jobs.

Kung Hei Fat Choi!

noreply@blogger.com (benson_te) — Mon, 23 Jan 2012 03:18:00 +0000

Wishing everyone the best of the year of the lunar Dragon.

Happy New Year! Kung Hei Fat Choi [in Cantonese]! Kiong Hee Huat Tsai [in Hookien]! and Gong Xi Fa Cai [in Mandarin]!

Thanks to my grade school classmate Edward Li for the dainty image which he posted at facebook.

An Inflationary Boom Powered Phisix Bullmarket

noreply@blogger.com (benson_te) — Sun, 22 Jan 2012 15:53:00 +0000

It is important, first, to distinguish between business cycles and ordinary business fluctuations. We live necessarily in a society of continual and unending change, change that can never be precisely charted in advance. People try to forecast and anticipate changes as best they can, but such forecasting can never be reduced to an exact science. Entrepreneurs are in the business of forecasting changes on the market, both for conditions of demand and of supply. The more successful ones make profits pari passus with their accuracy of judgment, while the unsuccessful forecasters fall by the wayside. As a result, the successful entrepreneurs on the free market will be the ones most adept at anticipating future business conditions. Yet, the forecasting can never be perfect, and entrepreneurs will continue to differ in the success of their judgments. If this were not so, no profits or losses would ever be made in business. Murray N. Rothbard

The mainstream view where the turbocharged performance by the Philippine Phisix is largely seen as representative of mainly a domestic affair and accounting for signs of economic “progress” is misguided.

The reality is what we observe as significant advances by the local stock market have instead signified as a global development.

Importantly, these magnificent gains account for as symptoms or illustrative of market’s reactions to easing policies adapted by global central bankers, whom has been promoting a negative real rate environment and has been engaged in massive interventions in the bond markets to provide political support to crisis afflicted governments and the banking system.

The Intensifying Rising Tide Phenomenon

The Phisix ranked an impressive second (based on nominal currency year to date returns) among the world’s top performers[1], last week. Not this time though. Bourses from developed economies to the BRICs to emerging markets and the frontier markets have advanced almost at a frenetic pace.

About 43% of the 72 global benchmarks I monitor posted year-to-date gains of 4% and above. That’s an incredible feat considering we are only 3 weeks into 2012.

Of course, these gains have distinct or individual stories to tell. While most of them seem to be in a recovery mode following last year’s pummelling, only a few bourses has broken into record highs or are within the ambit of previous record highs. The Philippines and slow starting Indonesia seem to fall into the latter two categories.

On the other hand, only about 20% of global equities have posted negative returns where many of them emanate from the MENA Middle East North African region.

While Argentina remains as the market leader on a year-to-date basis, the Philippine Phisix which posted an amazing 2.91% weekly gains this week, has been eclipsed by several major bourses.

Based on year-to-date nominal currency returns, aside from Argentina, the Phisix now trails Germany, Hungary, Brazil, Russia and Hong Kong. India’s BSE 30 is currently neck to neck with the Phisix.

And seen from the region’s performance, over the past 6 months the Philippine Phisix has dramatically displaced Indonesia and Thailand as the region’s trailblazer.

Chart from Bloomberg

It’s important to point out what you see depends on where you stand. Applied to the above, the 6 month perspective changes when we adjust for different time referenced starting points.

On a one year basis (not in chart) the Phisix has slightly surpassed Indonesia, while on a three month basis (not in chart) the Phisix still marginally trails Thailand.

The point is perspectives can be used to advance an observer’s subjective bias rather than to make an objective presentation.

Nevertheless in all three periods, the Phisix has either led the pack or has been slightly behind the leader. As to whether the Phisix can maintain such exemplary performance has yet to be ascertained. And as we have noted in the recent past, the leadership role among the ASEAN-4 bourses has been alternating.

And to give us a clue on what’s been driving the Phisix, we go to the year to date performance of each sector.

The property sector seems to have commanded the lead from last year’s run away leader, the mining sector which now ranks third. The service sector lead by the telecoms has taken the second spot while financials placed fourth.

Except for the service sector, the current rankings seem to fulfill my observations that capital intensive projects (mining, manufacturing, real estate related projects) are likely to benefit from artificially suppressed interest rates, whom will be financed mostly by loans via the banking sector (who will also account for as a beneficiary).

As I previously wrote[2],

Although I am not sure which sector should give the best returns over the short term, I am predisposed towards what Austrian economics calls as the higher order stages of production or the capital goods industries, which are likely the beneficiaries of the business cycle, specifically, mining, property-construction and energy, as well as financials whom are likely to serve as funding intermediaries for these projects.

Of course telecom companies are capital intensive projects too and became subject of an earlier boom bust cycles abroad—the dotcom bubble.

Yet the above dynamics looks like the interlocking and tessellating jigsaw puzzles all falling into their respective places, all of which seem to account for the business cycle.

And for a broader view of which issues from the Phisix basket has contributed much to the recent advances, the top ten largest free float market cap issues ranked according to their respective weights, based on year-to-date as of Friday’s close, can be seen in the above chart (largest to smallest market cap from left to right).

Combined, these issues account for about 61% weighting of the Phisix composite.

So far, the property majors have assumed the leadership role. Ayala Land (ALI) and SM Prime Holdings (SMPH), posted the best gains followed by holding firm Ayala Corporation (AC) and telecom titan PLDT (TEL). These firms have delivered the gist of the gains of the Phisix.

And it is further important to point out that the uptrend in net weekly foreign buying appears to support the case where foreign investors may have likely been loading up or has been providing a boost on these issues.

And as pointed out last week, it would be a mistake to ascribe current market actions as driven solely by corporate fundamentals or by micro factors when, in reality, general market sentiment has been revealing of a rising tide lifting all boats phenomenon.

Advance decline spread (weekly basis; upper window) has materially surged reflecting on broad bullishness of the marketplace. This has largely been due to the breakout of weekly advancing issues (lower window) from the consolidation phase. Given the limited number of issues listed, the ceiling or the maximum upside may have already been attained which means that we should expect rangebound actions but based on the current elevated levels.

What has essentially been happening on a global scene appears to parallel the developments being reflected on the internal market actions in the Philippine Stock Exchange (PSE).

Austrian Business Cycle In Progress

And as I have been reiterating, global central banks have slashing rates in near concert. The Philippines, this week, has joined the bandwagon of promoting policies which represents the euthanasia of the savers via a negative real rate environment[3].

Such policies are designed to stimulate aggregate demand, which have been couched and camouflaged in academic terms, when in reality, have been meant to advance the interests of the banking sector (as intermediaries of savers and borrowers) and the political class.

With nominal interest rates below consumer price inflation (CPI) levels, the public will be incented to shift money from fixed income instruments towards undertaking speculative activities and for entrepreneurs to invest on long range capital intensive projects.

Part of the effects of such policies, would be a boom in the stock market, which has already validated my thesis where negative rates will drive a stock market boom[4] as well as a boom in capital intensive projects such as in the real estate. I have been pointing out that we should expect a boom in the Philippine real estate industry[5].

And most of the funding of the latter’s project will likely be channelled through the banking sector (ergo expanding the latter’s profits).

As an aside, Philippine property sector has been showing signs of a vigorous recovery both in terms of annual price changes in Philippine housing and in luxury 3 bedroom units[6]

Also, at near record low rates, governments will be motivated to increase fiscal spending via more interventionists projects peddled or justified as “infrastructure” or “social” investments, which will be financed through the acquisition of more debts, and which subsequently will be sold and financed by the public through higher taxes or inflation.

Also, suppressed interest rates will impel consumers to spend more using credit cards and other credit programs or mechanism that leads to more consumptive activities.

Combined with higher government spending, and greater appetite for consumers to spend, not only does such activities lead to an overall growth in systemic leverage, thereby increasing fragility and risks, but likewise reduces the incentives for the local economy to produce more and tilts the balance of incentives towards greater consumption activities. Eventually this should unwieldy trade deficits.

Of course, adding to the systemic leverage will include entrepreneurs whom have been lured to invest in capital intensive projects.

Nonetheless, the initial burst of spending and speculation will be seen as a boom (as we are seeing today)

However, the competition for the use and consumption of resources (by government, consumers and entrepreneurs), as well as the misalignment between demand of consumers and investments in the production of capital goods will eventually get exposed through the interest rate channel.

As Professor Steve Horwitz explains[7]

The theory argues that the boom is generated by some exogenous factor that has caused market interest rates to diverge from the natural rate that accurately reflects the time preferences of consumers and producers. That exogenous factor is normally thought to be an excess supply of money, which is normally thought to be the product of bad central bank policy or problematic government regulations on the banking system. Once that bad interest rate signal is in place, intertemporal discoordination will result. The nature of money and the time-ladenness of production mean that we don't see that discoordination at first, as it is masked by the boom. The increased activity at both the higher orders of goods and the consumption level looks like growth until the fact that there is insufficient real savings to support the increased (now "mal") investment at the highest orders makes itself known.

Once interest rates level render many of these capital intensive projects unfeasible, the boom segues into a bust.

Yet countenanced with the prospects of depression, governments and their central banks has greater proclivity to resort to the same measures that has led to such problems—perhaps out of ideology, the interest to preserve the status quo, shared creed or dogma, groupthink, political pressures to apply policies that has immediate impact and path dependent actions—which ultimately becomes unsustainable.

As the great Nobel Prize winner Friedrich von Hayek wrote[8],

And since, if inflation has already lasted for some time, a great many activities will have become dependent on its continuance at a progressive rate, we will have a situation in which, in spite of rising prices, many firms will be making losses, and there may be substantial unemployment. Depression with rising prices is a typical consequence of a mere braking of the increase in the rate of inflation once the economy has become geared to a certain rate of inflation.

We don’t have to look far to identify where the global inflation cycle is being conducted. Since 2008, the balance sheets of major central banks of the world continues to balloon[9]! Inflation is being progressively compounded by through balance sheet inflation in order to keep asset prices afloat and to assure liquidity flows of the global banking sector.

And stepping on the brake by central bankers would extrapolate to a reversal of boom conditions in a disorderly manner.

Widespread Empirical Evidences

Over the past few years we have seen the same cycles being played out even outside the crisis afflicted developed economies, whether in Bangladesh[10], Brazil[11], India[12], Vietnam[13] or China[14].

Every time governments adapt easy money policies, we see booms in the stock market and or in real estate projects. And each time governments tightens the grip on monetary conditions in response to resurgence of consumer price inflation, we see the same weakness or discoodination pressures being reflected on the prices of their respective stock markets.

The great Ludwig von Mises reminds us that imbalances arising from policy intrusions can be reflected on the actions of the stock market[15]

The moderated interest rate is intended to stimulate production and not to cause a stock market boom. However, stock prices increase first of all. At the outset, commodity prices are not caught up in the boom. There are stock exchange booms and stock exchange profits. Yet, the “producer” is dissatisfied. He envies the “speculator” his “easy profit.” Those in power are not willing to accept this situation. They believe that production is being deprived of money which is flowing into the stock market. Besides, it is precisely in the stock market boom that the serious threat of a crisis lies hidden.

Yet it would seem bizarre for the public to bet on the stock market of a slackening economy, but that’s how these things play out, especially when the economy is seen to hit the proverbial wall.

A good example is China, where her stock markets have surged this year when economic figures has been revealing signs of marked deterioration.

Why the surge?

Because market participants have been conditioned or trained to react to signals where policymakers will likely resort to massive measures to reflate of the system, if and when the pace of deterioration reaches alarming levels that risks inciting political upheavals.

And indeed not only do we see a spike in the 3 month rate of change of China’s money supply late last year[16], but there has also been increasing reports, or say speculative expectations of planned stimulus in both financial[17] and fiscal dimensions[18].

While my concerns over a possible bubble implosion in China persist, which prompts me to remain vigilant, I would submit that a massive stimulus program, like her Western counterparts, could buy her time or defer on the day of reckoning.

Moreover rampaging money supply has been permeating into the US economy giving the impression of a ‘broad based recovery’

For instance analyst Ed Yardeni says that the recovery could be broad based[19].

This time, key sectors of the economy haven’t participated in the initial economic rebound, but finally may be on the verge of doing so. The second recovery could take off as the pace of hiring quickens, housing activity finally picks up, auto sales head higher, and state and local governments stop retrenching. If so, then the US would finally enjoy the benefits of a broader-based recovery.

Such appearance of a inflation induced time lag ‘recovery’ has been signalled by the US stocks markets.

Conclusion: Phisix Upside Momentum Should Continue Amidst Interim Corrections

In the face of economic slowdown and the risks of a contagion from the continuing crisis in Europe, global central bankers seems to have tactically implemented a defensive cordon or firewall by massively easing credit conditions partly in coordination with one another. This has led to near record low global interest rates[20] compounded by a surge in liquidity from the various asset purchasing programs being undertaken.

These measures, along with the hiatus in the Euro crisis and the noteworthy inflation induced economic recovery in the US—backed by a surge in money supply growth and recovering credit conditions—have been powering the recent gains of the global stock markets.

The Philippines has undertaken a similar policy route. And considering the still relatively low consumer price inflation, which has yet to trigger political outcry, negative real rates, which have been one of the key factors responsible for the recent monumental and historic breakout of the Phisix, will continue to influence the bullish momentum of the local bellwether, perhaps going into first semester.

But since no trend goes in a straight line, we should expect interim corrections which should serve as windows of opportunities to accumulate.

At the Philippine Stock Exchange, it is important to reiterate that the mining index has been outperforming other sectors in the PSE on a one year alternating interval basis[21]. And since 2011 was yet another stellar year for the sizzling hot sector, and if the alternating trend persists, then there could be another rotation process at work, partly away from the mines and into the broader market as the liquidity driven boom percolates.

But it is not necessary for the mining sector to register losses for a rotation to occur. What we are likely to see is that the variances in the distribution of returns will not likely be as distant as last year.

Since history may not repeat and may not serve as a useful guide in making predictions, and where the public’s recognition of the mining sector seemed to have reached a critical mass only at the current bullmarket cycle which began in 2009, I can’t discount the possibility that the alternating pattern might be rendered irrelevant. So diversifying could probably be the best solution under such scenarios.

Yet if there should be a rotation where gains will be spread out to the other sectors, I think that the best way to diversify would be to use the clues from the Austrian business cycle where capital intensive sectors (most likely property or real estate) and the finance industry could be the major beneficiaries of an inflationary boom (aside from the mines).

Finally, it is worth repeating that there has hardly been any sign of decoupling. As one would observe, local policies have been strongly influenced by policymaking trends in the developed world. We may call this globalization of central banking actions where central bankers not only seem to act in the same manner, but also coordinate or synchronize their activities and extend assistance to one another via swap facilities. And the transmission effect of the other factors of globalization—finance and capital flows, trade, labor and culture—remain as the other major force in shaping market conditions.

And as 2011 has shown, what has made the Phisix and ASEAN markets outperform has been the non-recessionary environment in the US, in spite of the Euro crisis, as well as, the relatively low debt levels compared with her western peers. This relationship is expected to continue through 2012 unless the world deglobalizes or adapts protectionist measures.

[1] See Global Equity Markets: Philippine Phisix Grabs Second Spot January 14, 2012

[2] See Phisix-ASEAN Equities: Awaiting for the Confirmation of the Bullmarket November 13, 2011

[3] See Philippine Government Applies Keynesian Remedies, Boom Bust Cycle Ahead, January 20, 2012

[4] See Investing in the PSE: Will Negative Real Rates Generate Positive Real Returns? November 20, 2011

[5] See The Upcoming Boom In The Philippine Property Sector, September 12, 2010

[6] Global Property Guide Philippine property prices rising again!, December 5, 2011

[7] Horwitz Steve Austrian Cycle Theory is Not a Morality Play, March 3, 2011 CoordinationProblem.org

[8] Hayek Friedrich A. von Can We Still Avoid Inflation? The Austrian Theory of the Trade Cycle, p. 89 Mises.org

[9] Danske Bank A deal for Greece is near, Weekly Focus January 20, 2012

[10] See Bangladesh Stock Market Crash: Evidence of Inflation Driven Markets, January 11, 2011

[11] Moneycontrol.com Brazil cuts interest rates for 4th time to restore growth, January 19, 2012

[12] Wall Street Journal India Adviser: Monetary Tightening Can End as Inflation Is Cooling, December 20, 2011

[13] See Vietnam Stock Market Plunges on Monetary Tightening, May 24, 2011

[14] See Has China’s Bubble Popped? May 29, 2011

[15] Mises, Ludwig von 3. DRIVE FOR TIGHTER CONTROLS, CONTROL OF THE MONEY MARKET p.145 The Causes of the Economic Crisis

[16] Holmes Frank Investor Alert - It May Take a Dragon to Breathe Fire into Markets, January 20, 2012 US Global Investors

[17] Bloomberg.com Chinese Officials Said to Weigh Easing Constraints on Banks, January 19, 2012

[18] China Real Time Report China Eyes Stimulus Targeted at Boosting Consumption, January 20, 2012 Wall Street Journal Blog

[19] Yardeni Ed A Double Recovery? January 17, 2012 Blog.yardeni.com

[20] See Global Central Banks Ease the Most Since 2009 November 28, 2011

[21] See Graphic of the PSE’s Sectoral Performance: Mining Sector and the Rotational Process, July 10, 2011